Rates Return to Neutral

Last month, when the Federal Reserve raised short-term interest rates by a quarter point, many assumed a negative impact on builder’s stock prices would soon follow.

P. O'Toole

January 01, 2000

Last month, when the Federal Reserve raised short-term interest rates by a quarter point, many assumed a negative impact on builder’s stock prices would soon follow.

Not so, says analyst Stephen Kim of BT
Alex. Brown, “If the Fed had not raised rates that would have been a negative.”

According to Kim, the market has been looking for the Fed to return to a “neutral bias” on interest rates. With last month’s increase the Fed fully erased three rate reductions by the Fed late last year and early this year. Importantly, Fed members also hinted they would remain neutral on rates in the near term.

Instead, builder’s stock prices rose in the days following the rate hike.

Robert Curran, an analyst with Merrill Lynch, thinks prices for builder stocks remain too low. And that, he says, relates to perceptions of the size of the decline in the sector in 2000.

“I don’t think the decline is going to be too pronounced given the strength of the economy,” says Curran. “Many of the larger builders will be able to report higher earnings next year coming off an incredibly high base.”